Special Topics

It doesn’t matter that the PPI is accelerating in most Zone countries...or does it?
The PPI has been rising rather rapidly for several months across a broad array of EMU nations. Over three-months the
PPI is accelerating compared to six months in all countries that are early reporters of the PPI. Four of these early
reporters also have ex energy inflation metrics available and for three of them the core is accelerating too.

The ECB sets its limits on consumer prices in the form of the HICP. It looks at total prices not core prices.
Still the ECB has allowed overshoots of its ceiling pace of 2% from time to time. So when it comes to inflation there are
rules and then there are practices...

There is no formal role for the PPI in the ECB framework. The PPI is more volatile than the ECB’s HICP but it does signal
when inflation is changing speeds. Right now it is signaling a pick-up in the pace of inflation. Looking back we can see that
while the PPI does tend to signal an HICP acceleration before it occurs, the PPI also signals accelerations that never do occur.
Even some fairly substantial PPI moves have failed to be translated into any real lasting pickup in HICP inflation. Even so the PPI
is still accelerating and it is not slowing as it is approaching the 5% mark. Despite the unreliability of the PPI signal this
acceleration will make the ECB nervous.

This is all part of an unfolding theme with continued EMU regional weakness and yet accompanied by rising inflation. Today a
Markit survey has found that its retail sales barometer for the euro-area strengthened in December to its fastest pace in two and
one-half years. News of strengthening economic figures despite the cloud over the head of EMU when it comes to sustained growth
prospects will strengthen the hand of the hawks at the ECB as the inflation data continue to pose uncomfortable readings.
With the incoming country by country PPI reports the discomfort continues.